Tax carousel - what is it and how to avoid it?

Service-Tax

In the era of the fight against the so-called the VAT mafia, every entrepreneur has heard of the tax carousel. It turns out that its effects affect not only criminals, but also careless entrepreneurs. What is a carousel and how to avoid getting caught up in it? We explain below.

What is a carousel tax?

The tax carousel has a negative effect on the level of prices of goods in the market. Tax fraudsters do not actually run a business, so they do not care about the profit from the sale.

It happens that the negative consequences of tax fraud affect honest entrepreneurs who have been accidentally caught in the carousel supply chain. At that time, the tax authorities questioned their right to deduct VAT, arguing that those who exercised due diligence should have known that they participated in a transaction aimed at tax evasion.

How can an honest taxpayer defend himself? It would have to be shown that the taxpayer as a buyer in a domestic transaction, despite exercising due diligence, did not know and could not have known that his contractor committed an offense in a given transaction. The refusal of the right to deduct the tax applies not only to situations where the taxpayer commits tax fraud, but also when the taxpayer knew or should have known that by purchasing the goods he participated in a transaction related to the so-called carousel.

Tax authorities inconsistently assessed the diligence of taxpayers, which resulted in a lot of controversy.In order to protect fair taxpayers, the Ministry of Finance has made efforts to develop a complete and precise list of buyer due diligence requirements in domestic transactions, the fulfillment of which would justify the assumption that taxpayers did not know and could not know that their supplier committed tax fraud in a given transaction.

Thus, the “Methodology for the Assessment of Due Diligence by Buyers of Goods in Domestic Transactions” was established. So what should the taxpayer do to exercise due diligence?

Tax carousel - how can an entrepreneur verify a contractor?

Before concluding a commercial transaction, the entrepreneur should check whether his contractor is an active VAT payer. For this purpose, it is enough to enter the NIP number in the search engine developed by the Ministry of Finance, which will check the status of the VAT payer by providing one of the three messages:

  • The entity with the provided tax identification number NIP is not registered as a VAT payer,

  • The entity with the given tax identification number NIP is registered as an active VAT taxpayer,

  • The entity with the given tax identification number NIP is registered as a VAT taxpayer exempt.

It is possible to print the returned message indicating the entity's status in VAT.

In addition, taxpayers can still apply to tax offices for a relevant certificate. However, using the above-mentioned service is much faster and more convenient. Additionally, confirmation of the VAT taxpayer status online is free of charge.

In the case of a foreign contractor, you must confirm the activity of his EU VAT number (VIES). A search engine developed by the European Commission is used for this purpose.

Company data can also be verified in the database of the National Court Register and the Central Register of Economic Activity. In particular, it should be noted whether the person acting on behalf of the counterparty has the right to represent him.

If the transaction concerns sensitive goods listed in Annex 13 of the VAT Act (e.g. fuels, some steel products), it should be checked whether the contractor has provided an appropriate guarantee deposit.

Tax carousel - what information should raise our suspicions?

The following situations should raise our vigilance:

  • if there is no data on the contractor in the KRS and CEIDG database;

  • if there is a person on behalf of the counterparty who does not appear in the registers as a person authorized to represent, and does not present an appropriate power of attorney;

  • the counterparty does not disclose the permits or licenses required to trade in a given commodity;

  • the contractor is not registered as an active VAT payer;

  • the contractor is included in the list of entities kept by the Head of the National Revenue Administration, which were removed from the register by the head of the tax office as VAT payers or which were not registered by the head of the tax office.

The above-mentioned methodology also contains a list of transaction criteria for assessing due diligence. It expressly stipulates that it is not closed, and therefore it must be borne in mind that when concluding the contract, other circumstances may also occur, indicating the existence of a risk of participation in tax fraud.

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Below are examples of circumstances that tax authorities bring taxpayers to the attention of:

1. No economic risk

Tax authorities warn against the risk of participating in the so-called a tax carousel, which increases in a situation where the buyer receives a proposal to establish cooperation consisting in the purchase of a specific product from the supplier and resell it to the indicated customer, without engaging his own funds in the transaction (the buyer would pay the supplier the price for the goods only after receiving payment from the registered customer).

Example 1.

Supplier A Sp. z o. o. offers Jan Kowalski a delivery of goods for PLN 200,000. At the same time, he recommends Jan Kowalski to a client who would buy goods from him for the amount of PLN 210,000. The parties agree on the payment date of the price in such a way that Jan Kowalski will pay the price of the supplier A Sp. z o. o. immediately after receiving the payment from its client. In this way, the supplier assumes the economic risk of both transactions.

2. The supplier offers to pay in cash

Particular attention should be paid to a situation where a counterparty tries to persuade the buyer to bypass the settlement payment through bank account requirement, which occurs whenever:

  1. Another entrepreneur is the party to the transaction from which the payment results;

  2. The one-time transaction value, regardless of the number of payments resulting therefrom, exceeds the equivalent of PLN 15,000.

For this purpose, the supplier may offer the buyer a high discount when choosing to pay in cash, or artificially divide the transaction into several smaller parts, the value of which is lower than PLN 15,000.

3. The taxpayer paid for the goods by transfer to two separate bank accounts, an account of a third party or a foreign account.

4. The price of the goods offered to the taxpayer by the contractor was much lower than the market prices.

The buyer is obliged to verify the contractor, especially when the price of the offered goods is very attractive, even suspiciously low. If the buyer has been operating on the market for years, and receives an offer from an entity just starting its business in this industry, who offers him a price that is much more attractive than a large manufacturer's distributor - it will be difficult for him to explain why he has refrained from further verification of the contractor.

5. The taxpayer purchased goods from the counterparty that belong to a different industry than the one in which the counterparty operates.

It happened that tax fraud was carried out by companies with an established position in another industry, e.g. a construction company took part in a tax carousel selling electronics. Fraudsters, in order to inspire the trust of contractors, deliberately bought long-established companies, ignoring their current subject of activity. Of course, companies can introduce new products to the market and even change their business profile, but this is a circumstance that should make a contractor vigilant.

It is worth knowing the above circumstances, which may indicate the risk of taking part in a carousel transaction and verify your contractors. This will allow an honest taxpayer to avoid the problem of VAT refund refusal.